Re: Best way to finance a used car

Looking to spend about $12-15K on a new car . . . but I need to know what options I have. Thinking about 4K down, and financing the rest.

I could finance this through:
Bank Loan: Not sure what the going rate is on car loans, but credit is excellent
Line of Credit: Prime plus one unsecured, more than enough credit
Used Car Dealer's Financing plans: would restrict the options of buying from user, dunnon how good their rates/deals are, or if they're ripoffs.

Basically, I need to know the pluses and minuses of each of these options . . .

If you don't have any plans for your LOC, at prime plus one, that's the way I'd go.

I had mine financed through the dealership at 7.2% 4yrs with baloon amount at the end. Just refinanced it at the lower prime plus one at my own bank. I'm betting even by the time rates do go up I'd have paid down a considerable portion of the loan already.

The interest I'm saving is put straight back into employer funded RSP program.

I'd go with the line of credit.

Well, common sense approach is to check out the interest rate on all 3 and go with the lowest. But do you really need advice on this?

Well duh . . .

I'm asking mostly about the conditions attached to the financing from used car dealers, whether or not getting a decent rate with a dealer us worth the sacrifice of being able to buy it from the owner (since I imagine cost will be higher) and experiences neogtiating rates from banks and other companies.

Obviously, I can tell 5% < 6%.

I was in the same boat as you and when i called the bank to see how much a personal loan was, the interest rate they gave me was insanely high (didn't have a LOC and was checking around) The girl that worked there even told me I should go with the dealership financing since it's better than what they can do. The dealership rates are sometimes lower than what you can get with a LOC, but definitely lower than the bank's car loan.

Originally Posted by RendX

I was in the same boat as you and when i called the bank to see how much a personal loan was, the interest rate they gave me was insanely high (didn't have a LOC and was checking around) The girl that worked there even told me I should go with the dealership financing since it's better than what they can do. The dealership rates are sometimes lower than what you can get with a LOC, but definitely lower than the bank's car loan.

For a new car, the dealership probably can offer you something good such as 0%. But for a used car, I think the dealership can probably just match the bank at the best.

Also, dealership rate and car loan rate usually are fixed rate. LOC is variable rate. They are not exactly apple to apple.

Check with a few banks, (especially on used autos) for a car loan, not for a personal loan or LOC. Dealerships are there to make money, and so, also make money on the loan. Verify the cost for the same loan at the bank as compared to the dealership. Alot of the times it will be cheaper at your local financial institution, depending upon credit history, bank, etc.

This might apply to 1% of all used car purchases:

The one problem with using a line of credit; is that since it isn't secured. If the car was to get written off AND the book value of the car is less than the amount you owe on the LOC. Your still on the hook for the difference. Whereass if the vehicle was financed you could just walk away (most of the time).

Mind you that's a pretty rare occurence and would be the same issue you have when you buy the car for cash. But it's something you should consider.

little off topic..what bank is giving you prime plus 1 for your LOC. I'm at prime plus 1.5 at royal bank at the moment.

Mark

Originally Posted by Kenneth

This might apply to 1% of all used car purchases:

The one problem with using a line of credit; is that since it isn't secured. If the car was to get written off AND the book value of the car is less than the amount you owe on the LOC. Your still on the hook for the difference. Whereass if the vehicle was financed you could just walk away (most of the time).

No, I don't think you can just walk away on a 'normal' car loan. You need a special car loan to have that feature.

for used cars, you can bet the "dealership" rate is going to be high. the bank loan will be normal market price prolly in the realm of the dealership rate... your LOC rate will almost be the lowest.

The main difference is that the dealership financing is pretty much as straightforward as you can get. You pay them something up front and every month you pay the same amount. It's easy to budget but hard to refinance b/c you'll have to negotiate with them if something comes up mid way through your term. The same is true with a conventional bank loan.

The line of credit offers you more flexibility but cash flow may be a restriction. Most have a minimum payment of 2% or 3% which can totally kill you depending on your credit limit. Let's say you have a $20,000 LOC and you use $15,000 to buy the car... well 5% is only $450 but what if all of a sudden you needed money and got another $5000...? the minimum payment each month is $600 so you have to watch for that.

otherwise if you can manage the cashflow, the line of credit is the way to go. you can refinance it on the fly, meaning you can pay down more or less each month... since you won't be paying minimum anyway after a certain point. This allows you to pay off say $2000 in one go or whatever if that's what was available to you. Soem might say though that a LOC w/ low interest is almost like free money so you might as well invest it or pay down a higher interest loan, etc.

Hope this helps.

Originally Posted by gman

No, I don't think you can just walk away on a 'normal' car loan. You need a special car loan to have that feature.

Once the loan is secured by the car; if the car was to suddenly disappear (written-off) the loan company couldn't come after you for the amount owing (loan value - insurance settlement). Unless of course they have a certain provision in the loan agreement.

But most major banks just assume the risk.

Originally Posted by actng

Hope this helps.

Thanks actng,
That does help a lot. Looks like LOC it is; after all, the finance amount will only be about 25% of my available credit.

Originally Posted by Kenneth

Once the loan is secured by the car; if the car was to suddenly disappear (written-off) the loan company couldn't come after you for the amount owing (loan value - insurance settlement). Unless of course they have a certain provision in the loan agreement.

But most major banks just assume the risk.

Of course, it does. You are the one who borrow the money. The car is the security. But, if the car value cannot cover the loan, the bank will go after you.

That is the balance is $10,000. Insurance pays $5000. The bank will go after you for $5000 unless the bank has a special provision to give you a special arrangement.